Drawing upon prior empirical research on the potential endogeneity of both ownership structure and firm performance in developed markets, this study examines the reverse causations that can exist between corporate performance and ownership structure in Tunisian listed companies. The study was extended to include another governance mechanism – board characteristics – as the principal internal control mechanism for monitoring managers and an assessment of its potential effects on firm performance and ownership structure. Our findings proved the existence of endogeneity and a two-way causality between ownership variables and MTB performance. However, our findings also revealed that corporate governance in Tunisian firms needed to be more strengthened based on board characteristics.
Keywords: corporate governance, ownership structure, board characteristics, corporate performance, endogeneity, simultaneous equations models.
The relation between ownership structure and performance has been a matter for an important and ongoing debate in the corporate finance literature. The debate goes back to Berle and Means’ thesis (1932). Since then, researchers have been interested in the effects of a separation between ownership and control of corporate enterprises. This separation creates agency costs because owners (principals) and managers (agents) have different objective functions (Jensen and Meckling, 1976). There are different monitoring mechanisms that, if implemented, should improve corporate governance. Furthermore, there are internal and external mechanisms. The external ones (e.g. market for corporate control) are particularly important in the Anglo-Saxon systems that experience dispersed ownership structures. The internal mechanisms (e.g. ownership concentration and board of directors) are, somewhat, predominant in emergent markets, including Tunisia. We investigate the Tunisian context that is completely different from the Anglo-Saxon one, where shareholders are mainly concerned with the value of their portfolios. This is true in most emergent countries, where ownership structures are very concentrated, institutional investor shareholding is very low and the board of directors represents the main organ of governance.
Our study presents a new evidence of the corporate ownership structure as a mechanism of corporate governance in Tunisia. First, we examine the influence of ownership structure (ownership concentration and insider ownership) on firm performance with particular attention to the non-linear relationship between managerial ownership and firm performance. We note that equity ownership by managers and monitoring by large blockholders are two ways that can potentially reduce the severity of the agency problem between managers and outside shareholders. Second, we analyze the impact of board characteristics on the performance of the firm. Finally, we evaluate the possible endogeneity between firm performance and ownership structure (concentrated ownership and managerial ownership). Thus, we consider ownership structure as endogenous and we try to identify its determinants. This is a useful contribution to the literature, as we are not aware of any other study, in the Tunisian context, of the endogeneity of ownership structure. In addition, endogeneity is important in practice but difficult and underexplored in empirical corporate governance research. Our findings proved the existence of endogeneity and a two-way causality between ownership variables and MTB performance.
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